Saving for the Future, in One Chart

A few months ago I showed you that your savings rate has far more impact on your retirement portfolio value than investment returns—especially early in your career. So the natural next question is, “How much should I save every year?”

A good way to answer this question is to figure out what you’re spending now, what you want to spend during retirement, when you want to retire, make some reasonable assumptions (inflation, returns, and more), and then calculate how much you need to save to achieve your retirement goal. Unfortunately, most physicians I meet don’t keep track of spending nor do they know what investment returns they’ve gotten in their overall portfolios. Do you?

So I’ve put together some guidelines on how much you should save every year. I usually don’t like rules of thumb, but I believe this chart should serve you well. Cut it out and post it on your fridge where you’ll see it regularly!

A few clarifications about these guidelines:

1. Income refers to you and your spouse’s combined gross income—not income after paying taxes and not income after deductions on your tax return.

2. The savings percentage should increase as your income increases.

3. The dollar amount of savings increases as your income increases for two reasons:

a. Solely by the fact that your income is higher (For example, 20% of $500,000 is a higher savings amount than 20% of $300,000.).

b. The percent savings rate itself increases (Increasing savings percent from 20% to 30% on $500,000 of income results in a higher dollar amount.).

4. Notice I’ve stated “at least” – that’s done on purpose.

5. You should not subtract your employer’s matching contributions into a 401k plan from the dollar amount of savings. The employer contributions are on top of the savings you should be making from your gross income.

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